Innovation can be a nebulous term – what is innovative to one person may be only clever marketing to someone else. A new technology may solve a problem and bring real value to users, or it may simply be another patent that sits in a drawer – but the company awarded the patent is still called innovative.
With such different definitions of innovation, it is no wonder that organizations are confused about what it is and how to apply it/leverage it/profit from it. It’s also not surprising that the phrase “business model innovation” engenders even more confusion and even fear. After all, if innovative products and services are so hard to conceive of, how can an organization be expected to innovate its business model, its raison d’être? And why should they go to such lengths?
What is Business Model Innovation?
A company’s business model is its plan for creating value, making a profit and differentiating itself from the competition. A business model includes the components and functions of the business, as well as the revenues it generates and the expenses it incurs. Using a business model framework – a way to understand your business model in terms of the complete value chain (customers, partners, suppliers, cost structure, etc.) – can help you better understand who your customers are, what value you provide to them and how you do it.
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Understanding your current business model is the first step to reinventing it using business model innovation. Although a business model is meant to have more longevity than a strategic plan, that doesn’t mean it will remain relevant and optimized forever. Companies should periodically ask questions such as “Who are our customers? What value do we offer to them? How do we do this?” If the answers are different than before it may be time for business model innovation.
You can think of business model innovation as “the search for newness.” Innovating your business model helps you find new customers and new markets, create new offerings and, ultimately, create new value. It can also help you discover new ways of doing business.
Dell is a famous example because they innovated the traditional distribution model for personal computers. Instead of selling pre-configured systems, they let customers customize their computer order online, and then built the computer to spec. Changing their business model in this way also required their suppliers to modify their processes, causing a ripple throughout the industry, but one that turned out to be advantageous for the industry and consumers alike.
Dell’s early adoption of Internet technologies to enable customers to configure their systems online is another hallmark of business model innovation. Dell’s business model capitalized on new Internet technology, as did the business models of Amazon and eBay. And, nearly 100 years ago, the auto maker Henry Ford leveraged new technology to transform his industry’s business model from labor-intensive single car creation to production line efficiency.
Today, the rapid pace of technology today has made it possible for companies to innovate their business model without waiting for a new technology to arrive – they simply need to look for new ways to use existing technology to deliver a better value proposition. This includes better, faster, cheaper value to current customers, as well as new value that serves a segment of the market that was previously neglected.
This is a quick overview of business model innovation. But the question remains: how do you know if you need it?
Is Your Business Model Threatened?
No company today can afford to rest on its laurels. Most industries are very competitive, and if you are one of the few in an industry without much competition you are likely to be disrupted by someone entering your market at a lower price point or with an equally damaging competitive stance. Every organization should question on a regular basis the who, what and how of their current approach to business, and ask if there is a better way to offer value to customers. Most likely the answer will be “yes” – although the way to improve it may be product, service, process or operational innovation. If none of these solutions will get you where you need to go, it is time for business model innovation.
For example, companies in commoditized industries such as telecom have been forced to innovate their business models because they can no longer compete on price. So telecoms that once offered simple voice and Internet access services are now offering online games, Internet television, videoconferencing and other value-added services that aim to distinguish them from the competition.
Your current business model might also be threatened if you offer a high-end product or service that not many people can afford. When (not if) low-end disruptors enter the market and start taking your customers, business model innovation may be the only way to compete.
Airlines, for example, used to be a mode of transportation reserved for the rich – everybody else took the train, or drove, or stayed home. Then a few airlines like Southwest, Air Arabia and Ryanair disrupted the market by capitalizing on operational efficiency and eliminating the “luxury” aspects of air travel. Eventually the whole industry was forced to change its business model in terms of who its customers were and how it served them.
These two examples – industry disruption and commoditization – are reactive reasons to engage in business model innovation. There are also proactive reasons to reinvent your value proposition with business model innovation.
Is Opportunity Knocking?
The flip side of the business model coin is opportunity. Instead of a innovating your business model because of a threat, reinvent it to take advantage of an opportunity. FedEx, for instance, recognized a business model opportunity in the form of guaranteed overnight package delivery. It was the first delivery company to offer this service, and as such it was able to go beyond price competition and provide a solution for a “job to be done.” People needed quick, guaranteed shipments (the “job”) and the FedEx business model provided the answer – and shaped an entire industry in the process.
Other times there may be an opportunity to serve a large market that is unable to access existing solutions due to price or other constraints. The so-called “$100 laptop” is a computer designed for children in developing countries. The manufacturer uses existing technology in an innovative configuration to make the computer affordable but also durable. In this case, a new company was founded on the business model innovation of making reliable computers inexpensive enough that the poorest countries could afford them for their children.
The Tata Nano is another example, only this is an existing company reinventing its business model to provide inexpensive cars to the masses in India. Business model innovations such as this enable established organizations to open up new markets by appealing to the “base of the pyramid” (the poorest socio-economic group) with value propositions that are new to this segment of the market. (Existing offering + new market still = business model innovation.)
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Perhaps the greatest opportunity that argues for business model innovation is return on investment. Statistics show that business model innovators see operational margin growth of more than five times that of competitors who only practice product or service innovation. If your company’s revenues are down or stagnant, innovating your business model could bring significant ROI and put you back on the path to profitability.
Of course, there is inherent risk associated with business model innovation (as with any significant strategic change). But along with great risk comes great rewards – and you can minimize the risk using tools for business model design and innovation. The first step is to fully understand your current business model, using a proven framework for analyzing your entire value chain.
You must also spend time analyzing your market, your competitors, potential competitors (which may come from outside your industry), and your customers’ (or potential customers’) needs (e.g., jobs to be done). With this in mind, you can revisit your business model and consider the changes you might make to better serve your customers or expand into a new market.
There are many companies who have breathed new life into their offerings, their revenue streams and their organizations using business model innovation. Let us learn from these examples and apply the tools of business model innovation to leverage new technology, enter new markets and create new value propositions.
About Kamal Hassan
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